My philosophy is that it is hard, but not impossible, to beat the market, and that it is easy, and imperative, to save on taxes and money management costs. I graduated from Harvard in 1973 with a degree in linguistics and applied math. I have been a journalist for 40 years, and was editor of Forbes magazine from 1999 to 2010. Tax law is a frequent subject in my articles. I have been an Enrolled Agent since 1979. You can email me at --williambaldwinfinance -- at -- gmail -- dot -- com.

Six Stupidest Economic Theories

1. Investment creates jobs. How often have you heard that line, especially from a Republican politician defending tax breaks for the wealthy? This economic claim is 180 degrees out of alignment with reality. The point of investment is to eliminate jobs.

The modernization of agriculture does not replace 100 farm jobs with 100 farm machinery jobs. If it did, there would be no point to the exercise. You might as well have those workers out in the fields as sweating over parts bins in a Deere factory. They’d get more fresh air and sunshine.

No, the point of mechanized farming is to replace 100 farm jobs with only 50 factory and dealership jobs, or maybe only 5. On such job elimination is built the improvement of living standards over the past two centuries.

2. Tax cuts make you better off. Here’s another wild claim from the pols. Too bad it isn’t true. If it were, the Bush tax cuts would have us in an economic boom.

If you want to reduce government’s drag on the economy, cutting taxes doesn’t do the trick. You have to cut government. That means cutting programs, which is tough to do.

Milton Friedman understood the difference. The economic damage done by big government, he said, is measured by the resources it yanks away from people. It doesn’t matter whether the yanking is done by levying a tax or issuing a bond or printing $100 bills (all of those methods being in active use today).

This explains why Ben Bernanke’s ambitious money-printing scheme is such a bust. The money just sits there, in bank accounts and sock drawers. People don’t want to invest or spend it because they know their tax cuts are going to boomerang sooner or later.

3. Performance fees pay off. A standard arrangement at hedge funds is that the investor gives the operator a bonus for success. Besides the base management fee, you are expected to cough up 20% of gains, or sometimes 20% of returns exceeding some benchmark.

We get rich only if you do, says the operator. The 20% take means you might have to pay a big fee, but then that would be a nice problem to have, wouldn’t it?

Suppose the fund scores big. It shoots up 40%, and after the bonus fee you have 32% left. That looks like a terrific deal.

4. Dividends are good for you. Investors are in love with dividends. They pour billions into dividend-seeking ETFs, they put up with clunky companies whose only attraction is a fat yield, they rhapsodize over prospects for getting more dividends from Apple.

What’s wrong with dividends? Just that you have to pay tax on them. Shareholders would be better off if corporations disbursed cash by buying in shares instead. That’s what Berkshire Hathaway aims to do.

But corporations going the Berkshire route confront a wall of criticism from commentators who have convinced themselves that buybacks are risky and potentially injurious to shareholders?

Whence comes the theory that a buyback is worse than a dividend? From a misunderstanding of the arithmetic. It looks as if buying in shares just before the share price falls is a waste of corporate assets. It isn’t, but understanding why it isn’t is hard, just as it is hard for a seven-year-old to understand that there could be such a thing as a negative number.

5. Rebalancing boosts returns. The experts tell you to rebalance your portfolio so that it has fixed percentages allocated to different categories, such as domestic stocks, foreign stocks, bonds and so on. If you aren’t disciplined enough to do this on your own then you are supposed to hire one of the experts.

So far in the 21st century, stocks have bounced around while going nowhere and bonds have done pretty well. Someone who rebalanced over the past 12 years would indeed have earned more than someone who allocated his money only at the beginning and then stood pat.

Pick a different time frame, though, and you get a different result. Analysts at Vanguard looked at stock and bond performance over the 74 years through 2009 and found this: Someone who bought 60% stocks and 40% bonds at the start, and then did nothing, would have averaged a 9.1% annual return; someone who rebalanced to 60/40 every month would have averaged only 8.5%.

Rebalancing is fine if all you are trying to do is sleep better at night. But the idea that it increases your expected return is balderdash.

If you believe the stories about investors fleeing, you are sorry for all those little people who got burned in the 2008 stock crash and then departed just in time to miss the market’s recovery.

Where do these stories come from? Sometimes, from journalists who look at the exit of assets from mutual funds but fail to notice that money is pouring into ETFs. Almost always, from journalists who fail to notice that big corporations buy back $350 billion to $450 billion a year of their own shares.

In economic effect, those buybacks are just substitutes for dividends. But in the statistics they get treated as departures from the stock market.

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I enjoyed your article as I have enjoyed quite a few others you have authored as well. However, I only take issue with a couple points you made in this particular article. First of all, in my humble opinion, investment absolutely creates jobs. Sure, often times, a particular investment from a VC or LBO firm may very well indeed require the initial trimming of jobs. However, this is only b/c it is most always necessary in order for the business to propel itself forward with the proper trajectory, which will in turn allow the company to realize growth and thus hire even more employees than they had prior to the investment. Furthermore, investment is simply what often enables the hard-working entrepreneur to see his dream come to fruition and his company to the marketplace. There are a lot of ideas out there that remain just that simply b/c they lack the funding to get their business rolling. Obviously, I know you are more than aware of what I am pointing out, but I choose to see investment as a necessary and absolute driving force behind job-creation. Investment presents itself in many forms, but I do believe that it most always yields greater opportunity for more people at more places of employment. Then, with regard to tax-cuts, I firmly believe that the marginal tax rates have a direct effect on economic growth and broad-based prosperity for one simply reason. Private individuals will always manage their money more wisely and efficiently than will any government. No one is saying that tax-cuts alone are the key to growth, but they are a vital component in the equation accompanied by the cuts to government programs as you wisely point out along with significant regulatory reform necessary to remove many of the barriers to creativity, innovation and job creation. Overall, I thoroughly enjoy what you have to say on subjects such as these and look forward to reading others that will follow.

When looking at the full bore effects of recessions and recoveries, it has to become obvious that trying to replace an elephant with a mouse just doesn’t work. Another words, when an economy suffers a market collapse and GDP declines 10% and government tries to stimulate the economy with a 5% of GDP stimulus package.

Stimulating an economy means it has to be prepared for stimulation. That requires returning the economy to where it was before the drop. Stimulation attempts that startr below this level are doomed. Returning the GDP to the prior level by an input equal to the 10% loss will then prep the economy for stimulation for growth. At that point a stimulus of 3-5% will get the economy moving.

Of course none of it does any good if the dysfunction that caused the market collapse is not corrected and stability returned to the market.

Regarding taxes and government spending, as can be inferred from above it will require changes in either of such magnitude as to warp the economy. To move the economy to either slow-down or speed-up using tax policy or government spending increases or decreases will require changes to tax rates or levels of spending that will distort the economy.

dividend’s are always better from a minority shareholder, long term hold, retirement savings point of view if they are done the right way by the firms paying them and if the investor’s are doing the correct due diligence. But you are certainly correct investors pour billions into funds and investments chasing yield. the vast majority of investors do not do the proper due diligence, much less have the proper education background. though the proper education background doesn’t necessarily mean a degree because if a person really wants to know the correct way to analyze investments they can certainly teach themselves through reading the innumerable amounts of readily available, empirical investment analysis books and research.